Overpriced insurance coverage

Just to add my two-cents' worth: A wise, and wealthy, man once said to me, "Price is only an issue in the absence of value."

You cannot disagree with that, and expect to be taken seriously.

All of us, even as agents, complain about the cost of our own insurances, at least some of it. But the fact of the matter is, no matter how much you believe it should cost, compared to what you're paying for it, the moment you have a loss, only to realize that you cancelled the insurance yesterday because it was "too expensive" or "overpriced", you'll wish you could get it back.

Politicians have even proposed cockamamie schemes that would actually permit people to drive around without auto insurance, and allow them to apply for coverage AFTER they have an accident.

Want to discuss "overpriced" in that scenario?

"How much damage did you cause?" the underwriter asks.

"Oh, it wasn't very much, I think it was only about $5,000," the poor uninsured driver replies, "So how much will the insurance cost?"

"Well, give me a sec . . . that'll be $6,500."

"But I told you, the damage was only $5,000."

"Right. How do you expect us to make the 30% profit you thought was too much two months ago when your premium was $1,000 per year?"

Other folks have a different attitude: My home and it's contents are valued at $500,000. My annual premium is $1,000. If I live in that home for 25 years, pay the same $1,000 or so per year, and have a $25,000 loss in that 25th year, I sort of break even. But in all those other years, at least I had the peace of mind knowing that if something DID happen, it would have been covered."

It's a love-hate relationship. Always has been, always will be. Like other things in life, with most insurance, you usually get what you pay for, but with(out) insurance, when you don't pay for it, you (or someone else) will get even less.

Life with insurance is good. But it's even better when you never have a claim.

What truly amazes me, however, is that these same people who rant and rave about insurance being overpriced . . . they're the same ones who continually reelect the same politicians to state and federal offices who vote for higher taxes, higher pay for public employees, higher pension benefits for those employees, like to tell us what a great job they're doing, and refuse to cut spending, eliminate useless employees and agencies, could care less about fraud in government, and now want to tell health insurance companies (at least beginning in 2014, perhaps) they must do business with everyone who comes their way.

Many do all the time. They're known as "mutual" insurance companies. They overcharge their policyholders so they can give them a dividend check every year. Some have a proud history of 75 years of uninterrupted dividends to their insureds.

That has to be one of the most asinine comments you've ever made here, and you've had your fair share of blunders.

In the past I've looked at a lot of the comments you've made with innacuracies as relatively innocent little mistakes where you've taken way too much of a matter-of-fact approach to certain topics.

Some of the suggestions you've made concerning how an agent should properly go about a situation have left me questioning whether you really practice in the insurance or financial advising role at all, as they've seemed largely impractical.

You've gone around touting the book Die Broke which is largely archaic and useless information. I remember a post from when you first started showing up around here when you referenced Suze Orman as a financial expert.

And now you've committed the little blade of grass blowing in the wind trend of let's talk about mutual insurance companies overcharging to refund premium because that's my literal-inside the box read of the legal definition of a dividend so it must--in fact without any room for possible interpretation--be the way it works.

The link you post to an e-mail in all of your posts states you live, breathe, and teach insurance. I sure hope you don't have many students or the state of Califonia is going to have a lot of poorly insurance educated individuals running around.

The former NY state insurance commiossioner once stated he wouldn't see why anyone would do business with a company that wasn't a mutual. I suppose he's just a foolish for taking such a one sided approach as you on a topic such as this.

And by the way, many mutuals have proudly talked about their dividend paying history as going way beyond 75 years there chief.

I don't have a problem with mutual insurers at all. But a dividend is a refund of excess premiums paid, plain and simple. If their premiums were lower they would probably not be paid, or not be paid as often, or would be lower than they are.

And as many mutuals as there are, why is it that few (none?) offer participating UL policies . . . the ones they seem to be so heavily promoting?

No, a dividend is a return of premium; this has huge tax benefits from an accounting point of view. It's entirely possible that a policy could have no premium basis and still receive a dividend.

Premiums don't exist because insurance companies overcharge for their products, they exist because insurance companies have profits. The same is true of non mutual insurance companies, and other corporations.

Are you going to tell me that the dividends my credit union pays me is a result of their either not paying me enough interest on my savings account, or overcharging the members who have loans?

What does paying dividends on Universal Life insurance have to do with any of this, and what would that prove with respect to your claim that mutuals overcharge for their premiums so that they can pay dividends?

On top of that, what major mutual life insurer is pushing Universal Life insurance?

But on the topic of mutuals and Universal Life, I got an e-mail the other week from one of the major mutuals telling me that due to better than expected mortality experience they are reducing the mortality (cost of insurance) charge on all of their future and in force universal life insurance policies issued under the 2001 CSO tables.

Now, also keep in mind that when a dividend is paid on a product like Whole Life insurance where there is a guaranteed rate of return, part of the dividend is calculated on investment performance that is better than that guaranteed rate of return (read has nothing to do with premiums collected). All of the major mutuals make a big deal out of the investment performance of their general accounts whenever they've achieved something superlative. In 2006 or 2007 (can't remember which) Northwestern Mutual was making a huge deal out of their year end (from the prior year) investment performance, which was near 20%. They even had a spot on CNBC to talk about it. In 2008 The Guardian moved it's general account entirely out of stocks and avoided most of the losses associated with the correction that took place later in the year, their press department was going wild.

Both Massmutual and Northwestern Mutual have issued participating disability insurance policies. Both generally have products that run cheaper than Berkshire/Guardian which does not issue participating disability insurance.

On the Property and Casualty side, a colleague of mine has home owners and car insurance through Amica, and recently made claim on his homeowners, contractor told him he loved working with Amica because they don't play the games a lot of the other companies he's dealt with do, and they don't try to cut corners in paying for repairs.

Are you going to tell me that the dividends my credit union pays me is a result of their either not paying me enough interest on my savings account, or overcharging the members who have loans?

Entirely different (taxable) subject -- but, yes, your CU probably pays less than 1% on most non-CD savings accounts, like mine does, charges 5%+ on first mortgages, 5%-8%+ on new and used car loans, and 15-18%+ on VISA/MC balances. And how much do they charge for overdrafts? $25? More?

So while the interest rates (paid or charged) are perhaps more favorable than other institutions, there's no doubt that credit unions are very profitable. As they should be.

I don't have a problem with insurance companies making a profit at all. They need to, and I wouldn't want to do business with one that didn't. But the fact is, if insurance company "dividends" were anything other than a refund of premiums paid with after-tax dollars, they would create a taxable event.

So perhaps it was a bit crass to characterize it the way I did, but it's not entirely unjustified. "Dividends" is and always will be a marketing ploy to make folks think they're getting something other than what it really is. Ask most policyowners how they got their paid-up additions and they'll probably tell you the insurance company "gave them to me." "Did you pay anything for them?" "No." "Really?" "Yes, they send me more almost every year." "Gee, that's really nice of them, isn't it?" "You bet!"

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No, a dividend is a return of premium; this has huge tax benefits from an accounting point of view. It's entirely possible that a policy could have no premium basis and still receive a dividend.

Sure. If it's been in force for many years, was heavily funded, and the owner borrows only the basis. The "dividends" are also based on each policy's percentage of ownership in the company -- based on premiums paid over time -- not premiums still in the cash value. Those dividends often come at the expense of policies that have lapsed providing the company continuing profits based on invested reserves, funded originally by the excess premiums (not needed for the immediate payment of claims or other expenses) that were invested and not refunded -- ideally, that money will remain invested nearly forever, since there is no longer any associated liability.

But I'm going to stand by my statement about excess premiums, because I'm not the only one who says it. From Fundamentals of Insurance for Financial Planning, by Beam, Poole, Bickelhaupt, and Crowe (published by The American College) (Fourth ed. [2003], p 72)

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When the premiums in a given period are more than adequate to meet losses and expenses, part or all of the excess is returned to the policyowners as a dividend. When premiums are inadequate, dividends may be omitted, and in a few cases, assessments can be levied on policyowners. [emphasis added]

You also asked:

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On top of that, what major mutual life insurer is pushing Universal Life insurance?

Well, how about New York Life? Their NYLIAC "Protector" or their NYLIAC "Instant Legacy" (single premium/estate planning) and NYLIAC "Asset Preserver" (single premium with LTC rider) UL products, among others? Unless they are mistaken, NYL says it is "the largest mutual insurer based on the Fortune 500".

Not enough to prove my point? How about what LIMRA published two years ago to the day:

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WINDSOR, Conn., June 2, 2008Universal life (UL) was the only individual life insurance product able to produce more new premium in the first quarter of 2008, according to LIMRAs life insurance sales survey.

UL sales were up eight percent. said Ashley Durham, LIMRA analyst for product research. Because UL holds the largest market share (42 percent), total new individual life insurance annualized premium increased one percent despite decreases in variable, whole and term products.

LIMRA reports that variable life (VL) and variable universal life (VUL) products dropped 26 and six percent respectively. Term life products decreased by three percent and whole life (WL) experienced the smallest declinedropping only one percent.

If UL is so profitable, why not issue participating policies? Why not indeed.

Maybe the chatter in the board room sounds something like this: "Let's retain those UL profits so we can pay some dividends on all those other whole life products that keep people happy despite the otherwise poor return and poor sales".

Not that UL crediting rates are anything to shout about at 4.5%-5.5% these days, but what else is driving UL sales? It's the fact that they are crediting double the rate of most CDs and the interest is tax deferred. I don't discount the power of that reasoning at all. It makes perfect sense, unless you know that when premiums are not calculated to properly fund the policy for genuine cash accumulation over the long haul, secondary guarantees aside, there is looming potential for disaster. Not for the insurer, but for the owner/insured/beneficiary.

NYL's footnote to the blurb about its no-lapse guarantee says:

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Failure to satisfy the Cumulative Required NLGR Monthly Premium test will cause the rider and the guarantee to become inactive and increase the potential that the policy may lapse for insufficient cash surrender value. At the end of the guarantee period, if only the required premium has been paid, the policy may lapse for insufficient cash surrender value.

What else is the policyowner going to pay but what the agent told him the (minimum) monthly payment is?

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on the topic of mutuals and Universal Life, I got an e-mail the other week from one of the major mutuals telling me that due to better than expected mortality experience they are reducing the mortality (cost of insurance) charge on all of their future and in force universal life insurance policies issued under the 2001 CSO tables.

This was to be expected. Early commentary on the CSO 2001 -- which increased life expectancy by 21 percent -- was that premiums/COI would initially drop by about 5% within the first five years of full implementation (which occurred in 2008-2009 because some states like CA were late in adopting the table), and an additional 5% within 7-10 years. The full effect of the huge increase in ultimate mortality will not be seen for another 15-20 years, when those born in 2001 start buying life insurance in larger numbers.

There are three different factors that go into determining dividends paid on a WL policy:

Mortality experience

Investment experience

Operating expense experience

These are all guaranteed rates inside a WL policy, when the company experiences actual results that are better than what they guaranteed from an aggregate stand point, they pay a dividend.

It's not just about collecting premium. And it's not just about collecting premium on one line of insurance. Dividends are created by more than just excess premium. Again, your literal use of definitions...

NY Life's having a UL that they've done some marketing for to attract business does not mean they are pushing UL.

You're LIMRA statistic does not show that Mutuals are pushing UL. Yes, UL sales are up. Almost every major insurance company has at least one UL product, and the public companies don't usually have WL products, so there's not a lot of other options concerning non-investment related cash value insurance products. There are like 5 public companies for every remaining mutual insurer out there, so UL sales being up over other lines would make a lot of sense. Let's not also forget that UL products generally come with huge commissions in the independent market compared to WL products.

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Maybe the chatter in the board room sounds something like this: "Let's retain those UL profits so we can pay some dividends on all those other whole life products that keep people happy despite the otherwise poor return and poor sales".

Compared to UL, the IRR on WL is extremely competitive and in most cases better. UL's more profitable because insurance companies don't tie themselves up with guaranteed charges for insurance with UL.

Concerning NY Life's UL product and their footnote...

It's an SGUL, with all SGUL (notice there's a difference between SGUL and UL with a secondary guarantee period or rider) there is a calculated premium to keep the secondary guarantee inforce. Some companies will even calculate a premium to pay for a defined period of time to guarantee the secondary guarantee with no future payments for the insured's entire life. It's very easy to figure out what this premium is. The example of an agent selling a policy and the client only paying the minimum premium doesn't make sense.

The amount you can pay for in car insurance each month will dictate how much auto insurance coverage you can take advantage of. There are many different levels of car insurance, and depending on the agency you purchase your insurance through will dictate how much coverage your are getting per your premium.